4 May 2009
What is a Self Directed Solo 401(k) plan
Self Directed Solo 401(k) plans are designed for the self-employed who have no employees. What this entails is a Self Directed Solo 401(k) is right for any sole proprietorship, LLC, partnership, S-corporation, or C-corporation without any employees (except those that can be legally excluded). The Self Directed Solo 401(k) plan can be used for a business that employs more than one person if they are all owners and or spouses. A Self Directed Solo 401(k) plan is like any other 401(k) plan and since January 1, 2002, they are now permitted for all businesses. Some good industry examples that have a high rate of qualified Self Directed Solo 401(k) plan clients are, real estate agents, service businesses, computer programmers, multi level marketers, consultants, mortgage brokers, and web designers; in fact any business performed by independent contractors is one which lends itself well to a Self Directed Solo 401(k) plan. We also have a high incidence of folks retired from large public companies (Boeing, Microsoft, Starbucks, etc.) that have started their own small businesses in retirement and have opened Self Directed Solo 401(k) plans to roll over existing corporate 401(k) into their own plan.
Control is important
People want control of their retirement funds. Most IRA or 401(k) custodians do not allow the kind of flexibility and access desired by many people. People who have amassed large sums in their corporate 401(k) plans and have now moved to other endeavors are often want control over their retirement dollars. A Self Directed Solo 401(k) plan allows checkbook control for an individual. After setup, the owner signs as trustee of the plan. The owner is trustee and administrator of their own plan. Experience has shown that when one has access to cash, the opportunities for investment seem to surface. A Self Directed Solo 401(k) plan can be the “bank of you.” Many folks want to use their retirement funds to invest in real estate or secured real estate related loans. Some may want to form an LLC or Partnership for investing in larger projects with friends. These alternative investments (see below) are not possible when the retirement funds are with a traditional brokerage acting as the custodian. In the right circumstances one can also borrow from their Self Directed Solo 401(k) plan.
Self Directed Solo 401(k) plans allow for greater diversification
Many of my clients tell me they are not happy with their stock market returns. A Self Directed Solo 401(k) plan is not a complete replacement for a stock market portfolio, but it allows powerful diversification. Any investing is hard work and requires a long-term perspective. Moving funds into so-called alternative investments can provide an investor with an opportunity to spread their risk.
What can you invest in?
Here is a list of what others have done with a Self Directed Solo 401(k) plan:
Buy part of a business
Buy a partnership interest or form limited partnerships
Fund limited liability companies (LLC’s) or corporations
Purchase startup company stock or member shares
Private placements (private company stock investment or loans)
Purchase residential rental properties, multi-unit buildings, commercial property,
storage facilities, boat slips, marinas, and parking spaces
Bare land parcels, lots, acreage, timberland, RV parks, mobile home parks
and other income producing land
Tenants in common for real estate investments
Tax lien certificates
Tax deeds
Lease options
Royalty rights
Stocks, bonds and mutual funds • (traditional investments)
Certificates of deposit
Commodities and futures
Commercial paper
Equipment leases
Joint ventures
A word of Caution
There a few types of investments that are impermissible and also transactions that constitute a "Prohibited Transaction" by IRS standards. The Penalties and taxes for committing such errors are steep. Therefore it is important that one works with a seasoned tax and legal professional when creating a Self Directed Solo 401(k) plan in order to have the consulting to navigate the potentially hazardous IRS rules and regulations. Please call us if you wish to arrange a free consultation to discuss your options.
John Kenney
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